The Theory of Efficient Breach Revisited

Abstract

This article reexamines the influential theory of efficient breach—the idea that breaching a contract is economically efficient when the breaching party's gains exceed the non-breaching party's losses—and argues that the theory fails to account for important costs including the reliance expenditures of the non-breaching party, the moral hazard created by the option to breach, and the systemic effects on contractual trust. The authors propose a modified framework that better accounts for the full social costs of breach while preserving the theory's core insight that specific performance is not always the optimal remedy.

Key Findings

• The standard efficient breach theory systematically underestimates the costs of breach
• Expectation damages alone do not fully compensate non-breaching parties for their losses
• The option to breach creates moral hazard that undermines contractual reliability
• A modified framework should account for reliance costs and systemic trust effects

Related Statutes

• Uniform Commercial Code, Article 2
• Restatement (Second) of Contracts

Related Cases

• Jacob & Youngs v. Kent (1921)
• Hadley v. Baxendale (1854)